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April 20, 2014

California Creates First State-Run Retirement Plan for Private Sector Employees

On Sept. 28, 2012, California Governor Jerry Brown signed legislation that will create the nation's first state-run retirement plan for private sector employees. The legislation, Senate Bill 1234, establishes the California Secure Choice Retirement Savings Trust for more than 6 million low-income, private sector employees whose employers do not offer retirement plans.

The plan will require all employers with more than five employees to withhold 3 percent of employees' pay unless employees opt out of the plan. The new retirement plan is designed to supplement Social Security and provide low-income workers with a portable savings plan with a guaranteed return. The plan will be administered by a board chaired by the state treasurer, which will select either a private investment firm or the state's public pension system to invest and maintain the plan's funds.

Under the new legislation, the state is required to conduct a study on the plan's feasibility, and the plan will be implemented only if it is projected to be self-sustaining and exempt from federal rules under the Employee Retirement Income Security Act that cover private sector benefit plans. In addition, under companion legislation signed by Governor Brown, Senate Bill 923, the plan's board will be made up of nine members, and the plan cannot be opened for enrollment without final approval in the form of an authorizing statute by the California Legislature.

Supporters of the legislation hail the new retirement plan as providing low-income workers with more retirement savings options. They claim that the plan will not cost California money, because it will be backed by underwriters and reinsured in order to protect returns. Critics oppose the legislation because it permits California's main pension plan, which is currently running a long-term unfunded liability of $100 billion, to invest the plan's funds, and puts taxpayers on the hook if the investment falls short of targeted returns. They also claim that low-income workers might be better off financially if they put after-tax earnings into a Roth IRA, which would allow them to take their contributions tax-free in retirement.

Employers doing business in California should monitor how the law will be implemented including what forms will be required to allow employees to opt out of this new systems.

© 2014 BARNES & THORNBURG LLP

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